India's benchmark 10-year bond yield touched a three-week high in early trade on Tuesday, as global crude oil prices rose further raising concerns over the need for the central bank to tighten monetary policy aggressively to contain inflation.
The benchmark bond yield was trading at 7.46 per cent by 0606 GMT, its highest since May 9.
Oil prices extended gains after the EU agreed to slash oil imports from Russia, fuelling worries of a tighter market already strained for supplies amid rising demand ahead of peak US and European summer driving season.
"Crude is holding above $120 a barrel. It is likely to keep the upward pressure on domestic inflation, so expectations that inflation will start easing may not necessarily materialise," a senior trader at a foreign bank said.
India imports nearly 85 per cent of its oil needs and high crude pushes up imported inflation. Traders will be looking at the GDP data due at 1200 GMT for near-term cues.
Asia's third-largest economy probably grew 4.0 per cent in the January-March quarter from a year earlier, a Reuters poll showed last week. That would be the slowest pace in a year, following 5.4 per cent growth in the previous quarter.
The latest Reuters poll conducted post the out-of-turn 40 basis point rate increase earlier in May, showed over a quarter of economists, 14 of 53, expect the RBI to hike by 35 basis points to 4.75 per cent in June, while 20 expect a larger move ranging from 40-75 basis points, including 10 who forecast a 50-basis-point hike.
The monetary policy committee is due to announce its next policy decision on June 8.
The RBI's primary focus is to bring inflation down closer to target but it cannot disregard the concerns around growth, Governor Shaktikanta Das told the Economic Times newspaper in an interview last week.
"The MPC next week will be the key trigger now. Depending on today's GDP data, we need to see if they stick to a potential 50 bps rate increase or go for something smaller to protect growth," a senior dealer with a private bank said.